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A New Era for MCC Threshold Programs

MCC has entered a new era for its threshold program. Honduras is set to become the first country to implement a new model of the program which is expected to help a country become compact eligible by allowing it to demonstrate its willingness to tackle tough reforms addressing policy constraints to growth in partnership with MCC. There is potential for valuable insight from this approach, but it has some limitations: the threshold program experience may not translate directly to a future compact experience, and any insight gained will only be relevant for countries that have a shot at compact eligibility based on other criteria.

According to MCC’s legislation, MCC’s board should consider three things when determining compact eligibility:

2) the opportunity to reduce poverty and generate economic growth, and

3) the funds MCC has available.

The original set of threshold programs were intended to help a country become compact eligible by improving its scores on selected eligibility indicators (criterion 1 above). In a commendable process of self-assessment and learning, MCC undertook a year-long internal review of the threshold program in 2010 (my colleagues Sarah Jane Staats and Casey Dunning presented their take on some of the issues raised in the review here). One of the main conclusions was that—for a variety of reasons—threshold programs had generally not helped countries move their indicator scores. This prompted MCC to adjust the program to support targeted reforms that address policy and institutional constraints to growth.

The new model threshold programs are expected to help a country become compact eligible by providing insight into the opportunity to reduce poverty and generate economic growth (criterion 2 above). According to MCC, the new model will allow countries to “demonstrate the capacity and political will to make difficult policy reforms in partnership with MCC. This will contribute directly to the board’s understanding of a country’s capacity to undertake the type of policy reforms typically required to enable a compact investment to have maximum sustainable impact.” Because compacts often entail policy and institutional reforms as a foundation for their capital investments, this kind of insight could be valuable. It’s also limited by the following factors:

A “country” is made up of diverse actors and interests. Governments are made up of a number of different authorities which often function very differently from one another. Unless the policy areas targeted by the threshold program are the same as those in which a future compact will work, the threshold program experience will be less informative about a future compact experience (a threshold program in, say, the customs sector won’t say much about a government’s willingness to tackle the reforms critical for a future compact investment in something like water and sanitation). It’s certainly plausible that a compact would work in the same sector as a threshold program since an analysis of constraints to growth informs both, but it’s not guaranteed. Even within a single sector, the ability to get political traction on different pieces of a reform can vary.

Political leadership changes. This is a desirable feature of a strong democracy, but it does mean that a government’s political will or commitment to certain reforms may change with administrations. This issue of policy uncertainty is nothing new for MCC and its multi-year partnerships; it’s one of the risks of its business model. But it is a particular consideration for a program that is intended to provide evidence of a country’s commitment and willingness to implement certain reforms.

In addition, any insight gained will only be relevant for countries that can realistically qualify for compacts based on other criteria, i.e., for countries that:

Are likely to remain in the competition pool for the near future. Tunisia was the first country selected after the transition to the “next generation” threshold program. However, at the time it was selected (in September 2011), MCC already knew that for the coming fiscal year (FY12), Tunisia’s income level would be too high to compete for compact assistance. In other words, the likelihood of the threshold program ever contributing to compact eligibility for Tunisia was known to be essentially zero when it was selected. That’s not to say that Tunisia’s threshold program when/if approved won’t have potential to yield real results, but it won’t assist it to become compact eligible.

Demonstrate strong performance on the indicator criteria. Even if a country implements a stellar threshold program, performance on the scorecard indicators is still the primary determinant of compact eligibility. In the last nine years, MCC’s board has initially selected for first or second compact eligibility only one country that didn’t meet the formal scorecard criteria at the time. This argues for MCC to continue its recent track record of selecting countries for the threshold program that are very close to meeting (or potentially already meet) the indicator criteria.

All in all, the new model of the threshold program addresses some shortcomings of the old version and could prove to be a better approach. There are limits to the insight it can provide in terms of understanding the opportunity for a compact to reduce poverty and generate growth, but the information it can offer does have value, as long as it is interpreted with these limits in mind. I’ll look forward to watching the new model of the threshold program in action in Honduras, as well as keeping an eye on Honduras’ prospects for compact eligibility in the future.